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When entrepreneurs found organizations, they make two key decisions: what products to sell and where to locate. First, they decide how similar their products should be to those of established competitors. If their products are too similar to those of established firms, new ventures will not be able to woo customers, but if their products are too different, they must launch extensive educational campaigns to explain the benefits of their products to potential customers. Second, they decide how close to competitors they should locate their new ventures. If they locate too close to competitors, new ventures run the risk of losing business to established rivals, but if they locate too far from competitors, new firms may lose customers who are drawn to a particular location but who are not satisfied with competitors' offerings. Fundamentally, these questions are the concern of basic economics: both cost structure and access to demand depend on product characteristics and geographic location.

Although organizational founding is an important theme in the growing research in organizational ecology (for reviews, see Romanelli, 1991; Aldrich and Wiedenmayer, 1993; Baum, 1996), in large part, this research has treated foundings as identical additions to homogenous organizational populations: the characteristics of new organizations, which define their domains, have not been of central interest. The absence of organization-specific factors in studies of founding stands in sharp contrast to ecological studies of failure and change, in which issues of population heterogeneity long have been conspicuous (Freeman, Carroll, and Hannan, 1983; Petersen and Koput, 1991). Studying heterogeneity in founding is more complicated than studying heterogeneity in failure or change: organizational attributes cannot be used as explanatory variables in analyses of founding because they cannot be observed for organizations that do not yet exist (Delacroix and Carroll, 1983). As a result, the organization itself cannot be the focal point of study (Lomi, 1995). Ecological researchers have sidestepped this complication by considering the population itself as the unit experiencing the events. The problem with this approach is that variations in social and economic conditions across the organizational population's habitat will produce differences in founding rates. If not properly accounted for, this heterogeneity will result in specification bias (Hsiao, 1986). Scholars have made some progress on this problem by focusing on differences among foundings within populations, either by specifying more fine-grained population substructures into which organizations are founded (e.g., Baum and Singh, 1994a; Freeman and Lomi, 1994; Baum and Oliver, 1996) or by deriving corrections for unobserved heterogeneity (Lomi, 1995).

While these research directions are promising, we take a somewhat different approach. Complementing past analyses that ask when founding will occur -- by any kind of organization within a population, in any location in that population's habitat -- we take organizational founding as given and ask what kind of organization is founded and where. Our approach is inherently relational. We view competition among firms as largely a function of their positions relative to each other in the resource space (Simmel, 1950). We are concerned with similarity to (or distance from) established organizations in terms of the attributes of new organizations relative to established ones. We ask: Given that a new organization has appeared, how similar is it to the organizations nearest to it?

Our focus on proximity contrasts with economists' positional approach to location choice. In the characteristics-space model of competition in economics, markets are conceived as N-dimensional spaces. Studying location choice involves first specifying all possible points within this space -- termed addresses -- and then examining how address densities influence which addresses receive new entrants. Unfortunately, this approach suffers from serious operational problems (artificial and arbitrary addresses, large numbers of addresses, ambiguous risk-set definition) that have undermined efforts to test the model empirically.(1) Consequently, entry-location studies typically either provide descriptive accounts of addresses that were actually filled (e.g., Shaw, 1982; Swann, 1985) or estimate empirical models that are seriously flawed. Because our relational approach does not require specifying addresses where foundings can occur, it avoids these problems.

We focus on choice of product characteristics (production capacity and price) and geographic location as the decisions that differentiate foundings within an organizational population. These choices are particularly critical for businesses for which demand is uncertain, costs of product reconfiguration and geographic relocation are high, and competition is segmented by product type and geography (i.e., competition is localized). We argue that two distinct processes drive entrepreneurs' decisions about how similar their new enterprises' offerings should be to those of established competitors and how close to established competitors they should locate: (1) the fear of direct competition pushes firms far apart from similar competitors, while the benefits of complementary differences pull firms close to dissimilar competitors; and (2) spillovers from adjacent competitors (i.e., agglomeration economies) and institutional forces pull firms close to similar competitors. We develop hypotheses concerning why firms will be subject to one process or the other and test them with data from the hotel industry in Manhattan over the last century.

Competition and the Differentiation of Organizational Domains

Organizations define relations with other organizations by staking out domains: claims about clientele served, goods and services produced, and technologies employed (Levine and White, 1961; Thompson, 1967). The more organizations' domains overlap, the more they require similar resources to thrive -- raw materials, labor, financial support, institutional support, and customer demand -- and the more strongly they compete (Hawley, 1950; Hannan and Freeman, 1977, 1989; McPherson, 1983). At one extreme, if organizations' domains overlap completely, the potential for competition will be fierce. At the other extreme, if organizations' domains do not overlap at all, they will require entirely different resources and there will be no potential for competition at all. Clearly, product demand and competition both depend on the products a venture proposes to sell and the clients it proposes to serve. And because opportunities and constraints (i.e., customers and competitors) exist in physical space, geographic location is a key defining characteristic of organizational domains that influences the degree of overlap among them and therefore influences competition (Yuchtman and Seashore, 1967; Aldrich and Reiss, 1976; Carroll and Huo, 1986). Supporting this view, recent studies have consistently found that the addition of an organization to a population has stronger competitive effects on neighboring organizations than on those further away (Baum and Singh, 1994a, 1994b; Hannan et al., 1995; Lomi, 1995).

Ecological models of localized competition focus on the importance of domain similarity for intrapopulation competition. In their seminal paper, Hannan and Freeman (1977) outlined a model in which competition among members of an organizational population is localized with respect to size. They conjectured that organizations of different sizes use different strategies and structures and therefore that large and small organizations, although engaged in similar activities, depend on different mixes of resources. Hence, patterns of resource use are specialized to segments of the size distribution, and similarly sized organizations compete most intensely. Studies of banks and life insurance companies (Hannan, Ranger-Moore, and Banaszak-Holl, 1990), health-maintenance organizations (Wholey, Christianson, and Sanchez, 1992), day-care centers (Baum and Mezias, 1993), and credit unions (Amburgey, Dacin, and Kelly, 1994) have provided evidence of size-localized competition. Baum and Mezias (1992) recently examined localized competition along two dimensions particularly germane to competition in the Manhattan hotel industry, geography and price, in addition to size. Supporting their extension of the size-localized model, they showed that Manhattan hotels more similar to one another in terms of size, room price, and geographic location competed more intensely.

In related work, Carroll (1985) proposed a resource-partitioning model, in which competition among large generalist organizations to occupy the center of a market frees peripheral resources that are most likely to be used by small specialist organizations. In concentrated markets with a few large generalists, small specialists can exploit more of the available resources without directly competing with large generalists. The model predicts that increased concentration among generalist organizations will increase failure among large generalists and decrease failure among small specialists. Carroll (1985) found support for this model in a study of newspapers. More recent studies of American breweries (Carroll and Swaminathan, 1992), rural cooperative banks in Italy (Freeman and Lomi, 1994), and specialist wineries in California (Swaminathan, 1995) also support this model.

A third localized-competition model is the niche-overlap model (McPherson, 1983; Baum and Singh, 1994a, 1994b). In this model, the potential for competition between any two organizations is conceived to be proportional to the overlap of their resource bases. Potential competition for each organization is measured using overlap density, the aggregate overlap of an organization's resource requirements with those of all others in the population; potential mutualism is measured using nonoverlap density, which aggregates the resource nonoverlaps with all others in the population. Entrepreneurs are unlikely to found organizations in sectors in which overlap density is high. Organizations in such sectors are also less sustainable. Conversely, entrepreneurs are most likely to found organizations in sectors in which nonoverlap density is high because there is no direct competition for resources and there is potential for complementary demand enhancement, For these reasons, high nonoverlap density should also lower failure rates. Baum and Singh (1994a, 1994b) found support for these predictions in a population of day-care centers in Metropolitan Toronto in which resource requirements were defined in terms of geographic location and the ages of the children they had the capacity to enroll.

The operation of localized competition has important implications for industry evolution. According to Hawley (1950: 201-203), localized competition eventually leads to differentiation. Organizations become differentiated as competitive pressures push less-fit competitors out of the market. Losing organizations are transformed either through functional or territorial differentiation, as organizations seek out distinct functions or locations in which they hold a competitive advantage and in which fewer competitors operate (Fombrun, 1986; Barnett and Carroll, 1987, Delacroix, Swaminathan, and Solt, 1989). Differentiation can also lead to the creation of new organizations that complement established organizations, resulting in the emergence of a complex system of differentiated organizations linked by mutualistic interdependencies. Hawley (1950: 209) described two distinct bases for mutualism: commensalism, positive interdependence based on supplementary similarities (e.g., similar organizations work together to enhance each other's institutional standing or sociopolitical legitimacy); and symbiosis, positive interdependence based on complementary differences (e.g., organizations with different capabilities cooperate or transact to the benefit of both).

Ecological models of localized competition have much in common with Hawley's model of competitive processes. But while Hawley's model emphasized that losing competitors are transformed, ecological models have tended to emphasize that losing organizations die and differentiated organizations arise from new births. In general, ecological models of localized competition suggest a pattern of disruptive or segregating selection, which tends to increase differentiation by producing gaps in the distribution of organizational domains rather than a pattern of stabilizing selection, which would lead the organizations to converge on a single domain (Amburgey, Dacin, and Kelly, 1994).

White's (1981) social-constructionist view, that markets exist as a set of induced role structures, rather than preexisting bounded entities, is congruent with Hawley's reasoning.(2) Strategists create markets or industries conceptually by arranging other firms in a set of niches and then identifying their own firms' roles within the induced set (see also Daft and Weick, 1984; Porac and Thomas, 1990, 1994; Porac et al., 1995). Domains are the reference points around which entrepreneurs conceptualize their firms' competitive positions vis-a-vis those of potential rivals. Entrepreneurs rely on social comparisons to assess their own firms' capabilities and to identify rivals. According to While, each firm seeks to be distinctive and therefore does not compete with other firms but, rather, finds and sustains cooperative roles with respect to one another. Markets and industries are thus systems in which firms seek to limit the need for competition by defining unique positions for themselves. At the same time, firms depend on the market or industry as a social group, or "frame of comparability" (Leifer, 1985; 448), to define their own identities in terms of the similarities and differences they have with other firms (White and Eccles, 1987).

Although there is an explicit geographic component to Hawley's work, White's theory does not discuss geographic location explicitly. There is, however, a component that can be conceived of as location in social-structural space. Studies have shown the strong influence geographic location can have on the social construction of markets in the knitwear (Porac et al., 1995), banking (Walton, 1986; Reger, 1990; Reger and Huff, 1993), retail (Gripsrud and Gronhaug, 1985; Porac and Thomas, 1 994), and hotel industries (Lant and Baum, 1995). A natural extension of White's logic about differentiation in social-structural space is to consider differentiation in geographic space. White's theory predicts that differentiation will reduce competition. Each current or potential competitor decides what and how much to produce by looking at the actions and performance of existing competitors, taking into account the difficulties inherent in trying to invade competitors' niches. …